I did miss a few things while I was on vacation, and one of them was the briefly-teased “First official marijuana recommendation” from Motley Fool co-founder Tom Gardner… and that intrigued me enough to go back and dig into the ad from early July, even though the ad is no longer active and the service they’re selling is not currently “open” for subscriptions.
The ad was for a new Motley Fool service called IPO Trailblazers, and I got it right before the Fourth of July holiday. Here’s what caught my eye:
“Motley Fool co-founder & CEO Tom Gardner just made his first official marijuana recommendation in the history of the company!
“… it’s also the first-ever pure-play marijuana stock to be officially recommended by any analyst here at The Motley Fool, outside of those in our dedicated cannabis service, Marijuana Masters!”
That doesn’t mean this is the first time marijuana stocks have come up at the Fool, of course, and Tom Gardner has been attached to some of those as well — his services have often touted Shopify (SHOP) as a marijuana play because of its role in facilitating online cannabis sales in Ontario, with the stock doing exceptionally well (though mostly not because of marijuana), and I sleuthed out that he was touting (disastrously, it turns out) Namaste Technologies (N.V, NXTTF) back in October as a way to lend his name to that Marijuana Masters newsletter.
But it sounds like they’re getting a bit more official now, so what’s the stock?
“Tom Gardner’s first-ever marijuana recommendation is actually the No. 1 CBD company by market share.
“If you know anything about the cannabis market, you know the CBD side of the industry is infinitely less regulated than the THC side, which is the drug in marijuana that actually gets you “high.”
“You’ve probably even seen CBD products at your local CVS or Walgreens.”
OK, so not really marijuana but (probably hemp-derived) cannabidiol. So that makes it a little more palatable for some folks than the still-technically-illegal US marijuana companies, I suppose. What else?
We do get some numbers….
“74% year-over-year revenue growth in 2018….
“… analysts expecting revenue to more than double in 2019… projecting it to increase sales by an additional 153% on top of that in 2020.
“$69 million cash stockpile, with minimal long-term debt.”
And it is apparently already profitable, which is a bit unusual in the US cannabis sector… and that it has only been public since September, but has risen 35% since then.
Other clues? Indeed, we end up with almost an embarrassment of them…
“Its financials are so impressive it recently was able to attract the head of Kellogg’s $3 billion snack business to join it as CEO.”
“The company’s market cap sits at just a little more than half a billion dollars. It’s still tiny!”
So what is the stock? Well, they say that they were releasing it for “free” at the time, though I didn’t click through to their promo video at the time (it’s offline now) and I don’t know whether that means really free, or free if you sign up for that premium newsletter service.
But I can, at least, let you know the answer: This must be Charlotte’s Web (CWEB in Toronto, CWBHF OTC in the US), a Colorado Hemp/CBD company that we’ve covered before.
And no, it’s not a “just over half a billion” market cap — though it appears that way in a lot of places. From what I can tell given the latest filings, they actually have 93 million shares outstanding — or 106 million if you want to be more conservative and include the (mostly way-in-the-money) options from the founders and early shareholders. At a US$14 share price (it’s listed in Canada, but is a US company and does its business in dollars so I try to avoid thinking in C$ with this one), that’s a market cap of $1.3-1.5 billion.
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So that’s the semi-hidden valuation challenge here — their $78 million in revenue and $11 million in net income sound substantially more impressive for a $600 million company (which is how it appears on a lot of websites) than for a $1.5 billion company. Though, it must be said, trading at 20X sales is not that unusual anymore for a high-growth company, and Charlotte’s Web is growing revenue quickly and has been profitable since before they went public last fall, so you can find reasons for optimism (if the analysts are right, it’s trading at only 4X the expected 2020 sales).
What Charlotte’s Web really is, though, is a bet on brand leadership. Interest in hemp production has grown quickly as the US government has begun to loosen the rules and allow hemp production, and as non-THC CBD products have quickly spread into mainstream retailers (though regulations and legality are still open questions for a lot of these products, and marketing or interstate sale of CBD supplements is still probably technically illegal, per the FDA).
Despite that uncertainty, however (and the uncertainty is presumably why Charlotte’s Web is listed in Toronto, not in New York — no US CBD or marijuana companies are US-listed, mostly because you can’t list an illegal business), Charlotte’s Web is selling a lot of CBD products, establishing what looks like a pretty strong brand, and making quite a bit of money.
So this one is pretty tempting, and I’ve been looking in on it from time to time over the past nine months because I do think that the “wellness” and CBD end of the cannabis business probably has a lot of potential as regulations clear up, and because it looks to me like they have a good chance of establishing strong CBD brand leadership in the US that could persist.
There are still lots of ways it could go wrong, of course, particularly if there’s a harsher FDA crackdown on CBD sales pending more study, but it could also go wrong as the business evolves because there might not be a lot of “secrets” or advantages in this business that meaningfully differentiate one product from another — which means it could become a commodity business, or it could become an oligopoly with a few large brands that dominate things, and brands can be expensive to build.
They did hire new leadership, including that teased executive from Kellogg’s (new CEO Deanie Elsner) as well as a “chief customer officer” who came from the pharmaceutical world, so you can see their focus on consumer packaged goods and health-related marketing, and their website is certainly appealing and they have some good early distribution (particularly for a “it could still end up being illegal” product) and, as far as I can tell, a good brand presence in the natural supplements space and a good story behind the product.
So is that story and possible brand leadership worth investing in? So far, I come back to “maybe,” but the fact that the FDA is working with the hemp industry, and the report that Charlotte’s Web has kept ramping up sales and planting more acres, and has built up their retail footprint dramatically so far this year, pushes me over slightly into the “let’s dip a toe in the water” category.
I love the strong revenue growth and the focus on building that brand, and that’s been consistent over the eight or nine months that I’ve been checking in on the shares… and the few analysts who follow the stock do have impressive growth estimates ($135 million in revenue this year, growing to $347 million in 2020 and $444 million in 2021), but this is also a really early stage company and we have to take those estimates (there are only three or four analysts providing them) with even more of a grain of salt than usual.
And I’m impressed by the fact that they now have four national retail partners (supermarket/drugstore retailers) and 6,000+ selling locations, more than a 50% increase from the end of 2018 — so the business looks good, growth looks good, and the potential market could be very large. I’m also pleased to see that they’ve moved (at the end of May) to the Toronto stock exchange from the little Canadian Securities Exchange. If it wasn’t for the regulatory question, this would be an easy speculation to make — but, of course, I could be wrong about their relative brand strength, and if it wasn’t for the regulatory question there would probably also be even more competitors spending heavily to take share.
But regulation is a very open question and probably the leading concern… the FDA had a hearing at the end of May and has been posting updates and warnings for consumers, but it will presumably be a while before the implied “we’ll work with you” promise leads to actual rules, and a lot of big retailers will likely wait until CBD supplements are explicitly legal to place meaningful orders or push products with marketing.
And indeed, though most pot-related stocks have been weak of late, it seems likely that some of the weakness in the last day or two with CWEB shares probably comes from the reminder that the FDA is paying attention — the FDA issued a warning letter this week to Curaleaf for the improper CBD health claims they had on their website, and that seemed to worry investors in other companies who sell CBD products, like CWEB. It wasn’t really “industry changing news,” from what I can tell, the FDA has issued dozens of similar letters to other hemp/CBD companies over the past four or five years, and Charlotte’s Web received a similar letter in 2017. My impression is that CWEB is already in compliance with those concerns and shouldn’t be at risk of being dinged again, they’ve already made their adjustments to their labeling and marketing language — though that doesn’t, of course, mean they won’t face changes or challenges as the regulatory environment evolves.
So with those risks at front of mind, buttressed by really impressive revenue growth, I’m taking my “I’m impressed” sentiment and channeling it into a small position for now. I’ll let you know how it goes.
Disclosure: I own shares of Shopify and Charlotte’s Web among the companies mentioned above. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.